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point of view of the U.S. economy, taxes paid to the federal government are transfers; the tax payments do not involve resources lost to the economy. Taxes paid to foreign governments, on the other hand, send dollars overseas which eventually will be redeemed by U.S. goods and services. From the point of view of the U.S. economy taxes paid by U.S. businesses to foreign governments are costs of business just as much as wage payments. A dollar paid out for a foreign laborer has the same effect on the U.S. economy as a dollar paid out to a foreign government.

Because tax payments to foreign governments have economic effects different from tax payments to the U.S. government, allowance of foreign tax credits is an important subsidy. Percentage depletion allowances, by themselves, can only halve the federal tax rate, due to the 50% of net income limitation. Foreign tax credits, in addition to depletion allowances, permit many extractive companies to pay little or no Federal tax. 11 Freight rates

There is little doubt that secondary materials bear higher freight rates than their primary material counterparts. For just one example, the 1966 average rail revenue per 100 pounds of iron and steel scrap was 20.6 cents, while the rate for iron ore was 8.2.12 Scrap iron and steel account for about 80% of all the secondary material shipped by railroads. Similar disparities, though not all of this size, exist for many other pairs of competing secondary and primary materials.

There is also little doubt that the cost of transportation is a significant proportion of the total cost of a secondary material (about 10% for secondary aluminum and scrap iron and steel, 20–30% for some grades of secondary paper). Consequently freight rate differentials between primary and secondary materials have a large impact on the amount of material recycled.

Mere existence of a rate difference does not mean that there is discrimination against secondary materials, however. If the cost of shipping a secondary material is twice the cost of shipping its primary material competitor, then the efficiency criterion indicates that the rates should reflect this difference.

In its environmental impact statement on recycling, the ICC noted the disparities in rates between primary and secondary. But then it argued that these disparities are justified on the grounds of differences in cost. Trade groups of secondary industries have counterargued that the disparities are too great to be explained only in terms of cost. They argue that other factors, such as the greater bargaining power of the primary industries, have widened the gap unfavorably for secondary materials.

Unfortunately this debate is far from resolution. The ICC's data, though voluminous, is not collected in such a way that the costs of shipping various materials can be computed easily, if at all. The problem is not entirely due to deficiencies in data collection, however. Allo

11 For a discussion of the mechanics of foreign tax credits see Graville, Jane, “Special Provisions of the Ferieral Income Tax Affecting the Oil and Gas Industrr: A Study of Provisions. Pros and Cons, and Selected References,” Congressional Research Service, Library of Congress, August 25, 1972.

19 Interstate Commerce Commission, Ex Parte No. 281, Draft Environmental Impact Statement, March 13, 1973, p. 15.

cation of the very large joint costs and the long run capital costs would be very difficult in any case.

Moreover, it should be pointed out that the criterion of economic efficiency, made operational by marginal cost pricing, has never been accepted as the only or even the most important basis for transport rate making. The ICC's first report, in 1887, sanctioned value-ofservice rate making. This basis for rate making has nothing to do with cost. Value of service charges "what the traffic will bear." Highervalued products, for which transportation is a lower fraction of total cost, absorb higher rates more easily and hence bear higher rates. Value of service rate making benefits both secondary and primary materials compared with much higher valued manufactured goods and encourages more material throughput, both primary and secondary, than would be the case with marginal cost rate making. It is still an open question whether value-of-service pricing benefits secondary materials more or less than primary materials.

It is also still an open question whether or not the large discrepancies in rates between primary and secondary materials can be justified in terms of cost difference. The most that can be said at this point is that justifications in terms of cost have not yet been made. Even if it were found that the discrepancies were based on cost differences rather than differences in bargaining power, the ICC has wide latitude to depart from cost-based rates when it deems it in the public interest or is so instructed by Congress.

The same type of problem exists with scrap and primary materials shipped overseas in freighters. With ocean freight there are also charges of discrimination against scrap in favor of primary materials.


One of the most obvious failures of the price system is the failure to include disposal costs in a product's price. In years past when the costs of waste disposal were very much lower, this failure in the price system hardly mattered. In rural 19th century America each farm had its own open dump; the little solid waste which accumulated could be thrown away at virtually zero cost. Now the cost of waste collection and disposal is approaching $30 a ton in New York City. And besides increasing in volume per capita, the waste is becoming more "exotic”modern solid waste contains more cadmium, arsenic, PCB and an increasing number of other substances which can impose further social costs after treatment and "disposal”. The price of a cadmium flashlight battery should include not only the sanitation department's cost of collection and incineration but also the cost of health hazard created by the cadmium vapor emitted from the incinerator smokestack.

While it hardly mattered a century ago, the failure to include disposal (and post disposal) costs in a product's price has become a serious failure of the price system. Another way of saying the same thing is to say that disposal costs have become a significant fraction of the total cost of many products. As a result there is too much material throughput in the economy and too little recycling. And the composition of products is shifted toward bulkier, heavier, and more toxic materials than would be the case if disposal costs were to be somehow

included in product price. As we shall see, this failure in the price system is easier to point out than to rectify. 1872 Mining Act

This act, in effect, provides that anyone who makes a mineral discovery on publicly owned land can acquire a property right to the mineral for a few dollars per acre. The situation is comparable to hunting on public lands. In the absence of regulation anyone could hunt on public lands; if he were lucky he would discover a deer, shoot it, and thereby acquire a property right to it. The policy of open access, and the creation of property rights by the “rule of capture," eventually led to overhunting. To conserve the game population, the rule of capture was modified by raising the price of hunting by the institution of license fees and imposing such restrictions as season limits and the rule of one deer for one hunter.

In an analogous way the 1872 Mining Act which prorides open access and the rule of capture for mineral discoveries, 13 encourages too much and too early exploitation of the mineral base.14 And in national lands where there is in theory a multiple use concept, the rule of capture shifts the balance of land use from recreation to mining.


Most of the above discussion can be summarized by returning to the analogy of liquid flow (p. 23).

The rule of capture and other incentives for exploration and development tend to increase the flow through H and hence I and C and all the flows in the economy. The percentage depletion allowance; capital gains for timber, coal and iron ore; foreign tax credits—all these advantages open the valve at I, again increasing the throughput of materials in the rest of the economy. Freight rates higher for secondary materials than for primary materials favor I over recycling flows E and G. Because the valves are left open at A, B and < (few or no disposal costs internalized into price), the throughput is again increased, leaving E, F and G to be slackened eddy currents.

In this view of the economy, recycling is not good per se, and the problem is not to increase recycling any way possible. The problems of too little recycling, too rapid depletion, and too much accumulation of solid wastes are very closely linked. They result in large part because the price system is giving the wrong signals. These wrong signals, happening in each of the major flow paths, lead to an imbalance in the flows. This view does not suggest that the answer is in a lack of technology or is in a volunteer effort to man recycling centers. If prices gave more nearly correct signals, technology would appear along with markets to replace the volunteers. Both EPA and CEQ have shared this view that the solid waste problem is not one of technology but of price and market failure. 15

13 In legal terms this form of the rule of capture is called "discovery and appropriation."

11 Gaffney, Mason, Ertractive Resources and Taration, University of Wisconsin Press, Madison, Wis., 1967, p. 391,

15 Sen Third Annual Report, Council on Environmental Quality, unpublished chapter on recycling; and also First Annual Report to Congress on Resource Recovery, Environmental Protection Agency, August 24, 1972.



The Resource Recovery Act offered the first statement of resource recovery as a national goal.16 Prior to this Act, recycling had not been given explicit attention as a tool in solid waste management. Solid waste management was thought of largely in terms of the efficient collection and disposal of waste material.

The Resource Recovery Act provides planning grants to States and funds to local agencies for demonstration of improved solid waste disposal facilities and resource recovery systems.

The act also directs EPA (1) to investigate the technology of recycling, (2) to investigate the effects of existing public policies such as percentage depletion and capital gains, and (3) to recommend incentives to promote recycling. In the past year there was considerable debate as to whether or not to recommend tax credits for processors of recycled material. It was pointed out that tax credits could well increase environmental costs by increasing total economic throughput and might have very little effect on conservation. In its first annual report to Congress EPA did not recommend tax credits or make other specific policy recommendations.

The authorized level of spending for the Resource Recovery Act in fiscal year 1973 was $216 million, $30 million was appropriated and spending was $16 million. The administration request for this year's budget was $5.8 million. Reasons given for the cut were (1) solid waste should be dealt with at the State and local level 17 and (2) the demonstration and grant programs are almost completed. While the administration seeks to end demonstration grants, it plans to increase EPA activity on hazardous wastes.


Amendments to the Internal Revenue Code 18 allow local and State governments to issue industrial development bonds for various pollution control purposes, including sewage and solid waste disposal facilities. Such industrial development bonds have a tax-exempt status. This permits the bonds to be sold at a discount, since investors are willing to accept a lower interest rate if this interest is not included in taxable income.

By means of an industrial development bond, a municipal government can issue tax-exempt bonds to finance the construction of a waste control or recycling facility for a private corporation. The corporation, in turn, agrees to rent or buy the facility, the cost to the corporation being determined by the amount needed to pay the interest and amortize the principal of the bonds. Typically, the municipality assumes no obligation; the payments are secured entirely by the proceeds of the sale or rent of the facility.

A recycling facility, to qualify for tax-exempt status, must include solid wastes as at least 65% of the material being processed for re

16 Unless one wants to count the National Environmental Policy Act which proclaimed recvcling a national goal.

17 The President's 1973 Environmental Message.
19 Internal Revenue Code $ 103(c) ; P.L. 90–364, § 107.


cycle.'' At first, Treasury ruled that solid waste facilities must not earn a profit in order to qualify, but now profit making is allowed. By one estimate in 1972 tax exemption on nearly $1 billion worth of bondsboth for pollution and recycling-led to about a $30 million tax loss.?

Ott and Otto argue that this type of subsidy is usually very inefficient. The question in this case is whether the value of extra recycling is worth more than the tax loss.


The Internal Revenue Code was amended in 1969 to provide for the rapid amortization of pollution control facilities. However, this federal incentive does little to encourage recyeling, since to the extent that a pollution control facility makes a profit-which is the general purpose of private recycling facilities-it does not qualify for rapid amortization. If a taxpayer is eligible and elects to apply rapid amortization to his pollution control facility, he can depreciate his facility over a 60-month period, in lieu of normal depreciation.

An important consideration in determining whether rapid amortization is likely to be claimed is the fact that to do so, the taxpayer is prohibited from claiming the 7% investment tax credit. The present value, computed at 8%, of the tax saving of rapid amortization as compared to double declining balance depreciation is less than the present value of the investment credit on assets having a depreciable life of less than 14 years.22 Consequently the restoration of the invest ment tax credit in 1971 for property generally has had the effect of greatly diminishing the importance of rapid amortization for pollution control facilities.


In February, 1971, President Nixon directed the federal government to step up its purchase of recycled paper and paper products. GSA now sets requirements that reclaimed fiber be used in government purchased paper. GSA specifications range from 3% to 100% for postconsumer waste and industrial paper residuals on selected purchase contracts. Federal purchases represent about 1% of the U.S. paper market. The specifications apply to 63% of the paper purchased by the Federal Government, but the specifications requiring recycled fiber apply mainly to GSA's second definition of scrap. For this reason CEQ wrote in its Third Annual Report that the specification promoting recycling "does not now directly attack the major solid waste problem of mixed postconsumer wastes." 23

An important problem with incentives for recycling by procurement is how to set the specifications. In the past recycled fibers were discriminated against in specifications which required ground wood stock or bleached paper. Now GSA is to discriminate in favor of recycled

19 Rev. Rul. 72–190: IRC 1031c) (A) (E). 20 Business Week, July 29, 1972, p. 51.

21 Ott and Ott, “The Tax Subsidy Through Exemption of State and Local Bond Interest," in The Economics of Federal Subsidy. Programs, a compendium of papers submitted to the Joint Economic Committee. Part 3, July 15, 1972.

22 Worthy, K. Martin. “Pollution Facilities Continue to provide Substantial Tax Benefits," The Journal of Taration, July, 1972. p. 2.

23 Council on Environmental Quality, Third Annual Report, p. 131.

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